Question 2 (25 marks) Trade Receivables Cash Total current assets 1,440 50 3,265 2.260 53 4,976 3,164 55 7.214 Total assets 23,621 26,117 27,425 You are the chief investment analyst for Big Ltd which is con- sidering acquiring a controlling interest in its competitor Large Ltd. The financial statements of Large Ltd for the last three cal- endar years (see below) have been provided to you: Equity and Liabilities Equity Share Capital Retained Earnings 8,000 6,437 14.437 8.000 7,313 15,313 8.000 7,584 15 584 Total equity Non-current liabilities 12% Debentures 5,000 5.000 5.000 Income statement for the years ended 31 December 2016 S'000 18,000 10,440 7,560 1,565 1,409 4,586 Current liabilities Trade Payables Bank overdraft Tax payable Dividend Payable Total current liabilities 2017 s'000 18.900 10,340 8,560 1,670 1,503 5,387 2215 390 1,300 894 1,600 4.184 388 2,300 1,045 2,071 5,804 446 3,400 747 2,248 6,841 2018 $'000 19.845 11,890 7,955 1,405 1,591 4.959 430 600 3,909 1,390 2.519 Total equity and liabilities Revenue Cost of Sales Gross profit Distribution costs Administration costs Profits before interest and tax Interest payable on bank overdraft Interest payable on 12% Debentures Profit before taxation Income Tax Profit for the year 23,621 26.117 27,425 600 3,882 1,380 2 502 600 4,572 1,625 2,947 Statement of Financial Position as at 31 December Required: (a) Compute the return on equity (RoE) before tax for 2016 using the following formula and explain the im- pact which debt-equity ratio could have on RoE. Interest expense Total liability ROE before tax = ROA + ROA - Total liability Total equity Assets Non-current assets Property, plant and equipment 2016 s'000 20.356 2017 S'000 21,141 2018 $'000 20,211 Current assets Inventory 1,775 2.663 3.995 Where: Interestexpense average interest rate Total liability Totalliability - total debt (gearing) ratio Totalequity Ratios Formula 2016 2017 2018 1. ROTA FBIT/total assets x 100 PBIT -ROA Totalassets 2. (5 marks) Operating profit PBIT/sales 100 margin 3. Asset turnover Sales/total assets 4 Gross profit margin Gross pront/sales x100 5 Other Operating costs as a % of sales (administration + distribution costs/sales x 100 (b) Prepare a report addressed to the Board of Directors of Big Ltd which will analyse the profitability, financial gearing, liquidity and efficiency of Large Ltd using the template below: (20 marks) Return on equity Profit for year/equity 100 7 Total liabilities/total equity All Debtequity Tatie Current ratio Current assets/eument liabilities 9 Quick asset ratio (Current assets stock)/ Current Liabilities 10 Cash ratio Cash/current liabilities 11 Foriod of inventory Closing stock/cost of sales 1365 turnover 12 debtoys/ sales * 365 Debtors collection period 13 Creditors payment Creditors/ cost of sales * 365 period 14 Ratios (11) + (12) - (13) Cash operating cycle